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LIFENET INSURANCE COMPANY
Copyright© LIFENET INSURANCE COMPANY All rights reserved. 1
NEWS RELEASE
May 16, 2013
Haruaki Deguchi, President/Founder
LIFENET INSURANCE COMPANY
(Securities Code: 7157, TSE Mothers)
European Embedded Value
for the Fiscal Year Ended March 31, 2013
EEV as of March 31, 2013: JPY 18,746 million
TOKYO, May 16, 2013 - LIFENET INSURANCE COMPANY (TSE Mothers
7157,
President/Founder: Haruaki Deguchi,
URL:http://ir.lifenet-seimei.co.jp/en/) hereby announces its
Embedded Value (EV) for the fiscal year ended March 31, 2013
(April 1, 2012 - March 31, 2013).
EV is an indicator used to measure the corporate value and
earnings performance of life
insurance companies. EV is the total of adjusted net worth,
based on balance sheet values, and
the value of in-force business, based on projected cash flows
from policies-in-force. In general,
life insurance policies provide a steady level of premium income
over a long period of time, while
advertising expenses, policy appraisal costs, etc. are expensed
intensively in a short period
around the time of policy sales. This timing difference in
recognizing revenues and expenses and
the long time it takes before profits are recognized after a
policy is sold are the characteristics of
life insurance policies. As these characteristics make it
difficult to evaluate a life insurance
business based on single-year financial results, disclosing EV
is seen as a useful way of giving
investors a more accurate picture of operating conditions.
Lifenet has adopted the European
Embedded Value (EEV) principles, which are widely used by
leading life insurance companies,
especially in Europe, Canada and Japan.
Lifenet’s EEV as of March 31, 2013 and the summary of the
results are as follows:
Summary of EEV results as of March 31, 2013
1. Lifenet’s EEV as of March 31, 2013 was 18,746 million yen, an
increase of 199 million yen
from the end of the previous fiscal year.
2. Adjusted net worth decreased by 1,347 million yen from the
end of the previous fiscal year.
3. Value of in-force business increased by 1,546 million yen
from the end of the previous fiscal
year due to an increase in in-force business.
4. Value of new business decreased by 660 million yen from the
previous fiscal year due to an
increase of advertising expense to acquire new businesses.
5. Value of new business (Ultimate Unit Cost base) decreased by
982 million yen from the
previous fiscal year.
6. Value of new business (Ultimate Unit Cost base) per policy
decreased to11 thousand yen
(27 thousand yen in the previous fiscal year).
http://ir.lifenet-seimei.co.jp/en/
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LIFENET INSURANCE COMPANY
Copyright© LIFENET INSURANCE COMPANY All rights reserved. 2
NEWS RELEASE
EEV as of March 31, 2013
(millions of yen)
March 31, 2012 March 31, 2013 Increase(Decrease)
EEV 18,547 18,746 199
Adjusted net worth*1
13,425 12,078 (1,347)
Value of in-force business*2
5,122 6,668 1,546
Value of new business
(millions of yen)
March 31, 2012 March 31, 2013 Increase(Decrease)
Value of new business*3 788 127 (660)
Value of new business (Ultimate Unit Cost base)*
4
The table below shows the value of new business calculated
applying ultimate maintenance
expense assumptions in the tenth year after the company’s
start-up to all years:
(millions of yen)
March 31, 2012 March 31, 2013 Increase(Decrease)
Value of new business
(Ultimate Unit Cost base)*4
1,692 709 (982)
*1 Adjusted net worth is defined as the excess of the market
value of a life insurance company’s assets over the
market value of its policy reserves and other liabilities, and
is considered to be the value attributable to the
company’s shareholders. In other words, it is calculated as the
sum of the total net assets, appropriate adjustments
for unrealized gains/losses and other items.
*2 Value of in-force business is the present value at the
valuation date of future after-tax profits distributable to
shareholders from in-force business as of the valuation date,
calculated under a set of assumptions.
*3 Value of new business represents the impact on the EV of new
business written during the fiscal year, calculated
applying the same assumptions as those used for the EEV. New
business used for value calculation is defined as
that arising from the sale of new life insurance policies during
the fiscal year and excludes future new business.
*4 The expense assumptions used to calculate the EEV and the
value of new business are set based on the premise
that unit costs decrease as the number of policies in force
increases, and reach their ultimate equilibrium levels, at
which income and expenses are equal, in the tenth year after the
company’s start-up (fiscal 2017). For reference,
“Value of new business (Ultimate Unit Cost base)” shows the
value of new business calculated applying the
ultimate unit costs to all years.
About Lifenet URL： http://ir.lifenet-seimei.co.jp/en/
Returning to the original purpose of life insurance - mutual
support - LIFENET INSURANCE
COMPANY was founded with the goal of offering simple, convenient
and competitively priced
products and services based on the highest levels of business
integrity. We sell these products
and services directly to customers over the Internet. By using
the Internet, we are able to offer
highly cost-competitive products and accept applications from
customers at any given time.
Contact:
Corporate Development Department, Investor Relations
Tel: +81-3-5216-7900
e-mail: [email protected]
Disclaimer: This is a summarized translation of the original
Japanese document, prepared and provided
solely for readers' convenience. In case of any discrepancy or
dispute, the Japanese document prevails.
http://ir.lifenet-seimei.co.jp/en/mailto:[email protected]
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May 16, 2013
LIFENET INSURANCE COMPANY
Disclosure of European Embedded Value
as of March 31, 2013
LIFENET INSURANCE COMPANY (“Lifenet” or “the company”) is
disclosing its European
Embedded Value (“EEV”) results as of March 31, 2013.
Contents １． Outline of EEV
.........................................................................................................................
2
２． EEV results of
Lifenet...............................................................................................................
3
３． Movement Analysis
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8
４． EEV Methodology
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11
５． Principal EEV Assumptions
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15
６． Sensitivities
.............................................................................................................................
17
７． Notes on the Use of the Information
.......................................................................................
19
８． Third Party Opinion
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19
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1. Outline of EEV
(1) What is EV? The income and expenses of life insurance
contracts are typically not matched in timing of
occurrence, with substantial acquisition and other costs in the
first year and with a delay between
acquisition of the contract and the emergence of profit. This
makes it difficult to evaluate a life
insurance operation on the basis of a single year’s income and
outgo. Embedded Value (“EV”),
calculated as the sum of net asset value and the present value
of future after-tax shareholder profits
from the in-force business at the valuation date, has been
adopted among life insurers in Europe,
Canada, Japan and elsewhere as an approach to the valuation of a
life insurer and to the evaluation of
its performance.
(2) What is EEV? European Embedded Value (“EEV”) has been widely
adopted in recent years among the leading
European insurers.
The EEV Principles and Guidance were published in May 2004 by
the CFO Forum, a group
consisting of CFOs from leading European insurance companies.
The aim of the EEV Principles and
Guidance is to improve the consistency and transparency of the
financial reporting of embedded
values. Additional EEV Guidance was published by the CFO Forum
in 2005 which covered
sensitivities and aspects of disclosure.
More recently the European Insurance CFO Forum Market Consistent
Embedded Value Principles©1
(“MCEV Principles”) were published in June 2008 by the CFO Forum
with more clearly defined
allowances for risk. A revision to these MCEV Principles was
published in October 2009.
(3) EEV Approach The allowance for risk in the shareholder cash
flows is a key feature of the EEV Principles. Lifenet’s
EEV has been calculated using a bottom-up market-consistent
approach, in which the discount rate is
set individually for each product or cash flow according to the
risk characteristics of the product or
cash flow.
EEV is calculated such that future cash flows arising from
assets and liabilities are valued
consistently with cash flows arising from similar traded market
instruments, with allowance included
for non-traded or non-diversifiable risk.
These approaches have been increasingly adopted among leading
European insurers; moreover, the
MCEV Principles define a bottom-up market consistent
approach.
1 Copyright © Stichting CFO Forum Foundation 2008
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2. EEV results of Lifenet
The EEV results are presented below. For more details on the
methodology employed, please refer to
“4. EEV Methodology”.
The embedded value on an EEV basis as of March 31, 2013 is ¥
18,746 million. The adjusted net
worth is ¥ 12,078 million, the value of in-force business is ¥
6,668 million and the value of new
business issued in the financial year ended March 31, 2013 is ¥
127 million.
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
EEV 18,547 18,746 199
Adjusted net worth 13,425 12,078 (1,347)
Value of in-force business 5,122 6,668 1,546
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of new business 788 127 (660)
Value of new business (Ultimate Unit Cost base）
For reference the table below shows what the value of new
business would be if calculated applying
the ultimate maintenance expense assumption for fiscal year 2017
in all years. (See sections 2(3) and
5(2) for further information.)
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of new business 1,692 709 (982)
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(1) Adjusted net worth
Adjusted net worth represents the market value of assets in
excess of reserves and other liabilities.
Adjusted net worth is the sum of the net assets on the balance
sheet and appropriate adjustments for
unrealized gains/losses and other items. The adjusted net worth
has been derived as follows.
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Adjusted net worth 13,425 12,078 (1,347)
(a) Shareholders equity on the
balance sheet 16,159 16,071 (88)
(b) Unrealized gains/losses on
securities (0) 20 21
(c) Internal reserves as quasi-equity
liabilities (Note1)
732 1,001 269
(d) Deferred assets defined in article
113 of Insurance Business Act (3,659) (5,300) (1,641)
(e) Tax effect (Note2) 194 285 91
Note１: Price fluctuation reserve and contingency reserve
Note2: Tax effect on (b) and DTL (deferred tax liability) in
relation to (d)
(2) Value of in-force business
Value of in-force business represents the present value as at
the valuation date (March 31, 2013) of
future after-tax profits distributable to shareholders from the
in-force business as of the valuation
date, calculated under a set of assumptions (see Section 5), and
consists of the following
components.
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of in-force business 5,122 6,668 1,546
(a) Certainty equivalent present
value of future profit 11,147 15,425 4,277
(b) Time value of financial options
and guarantees － － －
(c) Frictional cost of capital (95) (121) (25)
(d) Allowance for non market risk (5,930) (8,635) (2,704)
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・ The certainty equivalent present value of future profit is the
present value of future profit
calculated deterministically by assuming the investment yield is
equal to the risk-free rate and
using the risk-free rate as the discount rate.
The table below shows the Present value of in-force business
premiums included in the
calculation of the certainty equivalent present value of future
profit.
(Millions of yen)
March 31,
2012
March 31,
2013
Increase
(Decrease)
Present value of in-force business premiums 70,514 102,142
31,627
・ The time value of financial options and guarantees could be
calculated stochastically using a set
of market-consistent risk-neutral economic scenarios for the
cash flows with options or
guarantees. However, the time value of options and guarantees is
set as nil as the products of
Lifenet are non-participating death and medical coverage
protection products with no surrender
value.
・ The frictional cost of capital represents the costs associated
with maintaining the level of capital
which the company considers as required in continuing the life
insurance business.
・ The allowance for non-market risk is an estimate of the impact
of non-market risks which are
not adequately allowed for directly in the certainty equivalent
present value of future profit.
(3) Value of new business
Value of new business is the value at the valuation date of the
new business written during the fiscal
year 2012, calculated applying the same assumptions used to
calculate the embedded value as of that
date.
New business means the life insurance policies commencing within
this accounting period (the fiscal
year 2012) and does not include values anticipated from future
new business. The figure for adjusted
net worth represents the loss arising between the point of sale
and March 31, 2013 on business sold
in the period. The table below shows the results.
The main impact for the decrease in Value of new business is
increasing advertisement expense for
new business sales.
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(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of new business 788 127 (660)
Adjusted net worth (2,192) (2,582) (390)
Value of in-force business 2,981 2,710 (270)
Certainty equivalent present
value of future profit 5,788 5,473 (315)
Time value of financial options
and guarantees － － －
Frictional cost of capital (45) (38) 7
Allowance for non market risk (2,761) (2,724) 37
The table below shows the new business margin, calculated as the
ratio of the value of new business
to the present value of new business premiums.
(
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
(a) Present value of new business
premiums 34,393 34,153 (240)
(b) Value of new business 788 127 (660)
Value of new business / Present value of
new business premiums ((b)/(a)) 2.3% 0.4% (1.9)points
The table below shows the value of new business on a per-policy
basis.
(Thousands of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of new business per policy 12 2 (10)
Value of new business (Ultimate Unit Cost base)
The expense assumptions used to calculate the EEV as well as the
value of new business shown
above has been set assuming a continuous increase in the number
of policies in-force over the first
10 years of operation (i.e., until fiscal 2017), so that the
maintenance expense per policy decreases
over this period.
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For reference the tables below shows what the value of new
business, as well as the new business
margin, would be if calculated assuming the ultimate maintenance
expense assumptions (from fiscal
2017) applies in all years.
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of new business (Ultimate Unit Cost base) 1,692 709
(982)
Adjusted net worth (1,769) (2,322) (552)
Value of in-force business 3,462 3,032 (429)
Certainty equivalent present value of
future profit 6,270 5,795 (474)
Time value of financial options and
guarantees － － －
Frictional cost of capital (45) (38) 7
Allowance for non market risk (2,761) (2,724) 37
The table below shows the new business margin (ultimate unit
cost base).
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
(a) Present value of business premiums 34,393 34,153 (240)
(b) Value of new business
(Ultimate Unit Cost base) 1,692 709 (982)
Value of new business / Present value of new
business premiums ((b)/(a)) 4.9% 2.1% (2.8) points
The table below shows the value of new business on a per-policy
basis (ultimate unit cost base).
(Thousands of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Value of new business per policy
(Ultimate Unit Cost base) 27 11 (16)
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3. Movement Analysis
The table below shows the analysis of the increase (decrease) in
the embedded value during the 12
month period ending on March 31, 2013.
Required capital and free surplus, the components of the
adjusted net worth, are sensitive to the
increase or decrease of the volume of in-force business.
Required capital increases with the volume
of in-force business. On the other hand, free surplus decreases
due to the costs of issuing new
business (mainly the initial expenses).
The issuance of new business is also an important factor in
changes in the value of in-force business.
EEV
Adjusted net worth
(Required capital)
Adjusted net worth
(Free surplus)
Value of in-force
business
EEV as of March 31, 2012 18,547 1,308 12,117 5,122
New business value 127 438 (3,021) 2,710
Expected existing business contribution
(Risk free rate） 435 0 28 407
Expected existing business contribution
(In excess of risk free rate) 16 0 14 1
Expected transfer from Value of in-force
business to Adjusted net worth 0 (433) 843 (410)
Operating experience variances 524 0 745 (220)
Assumption changes (707) 0 0 (707)
Operating EEV earnings 396 4 (1,389) 1,781
Economic variances and assumption changes (210) 2 22 (234)
Change in EEV 185 6 (1,367) 1,546
Adjustment to the value at March 31, 2013 13 0 13 0
EEV as of March 31, 2013 18,746 1,315 10,763 6,668
New business value
This is the change in EEV due to the value of new business
issued during the fiscal year 2012.
For details of the approach, see section 2.(3).
Expected existing business contribution(Risk free rate)
In calculating the value of in-force business, future expected
profits are discounted back using
risk-free rates. Thus, the discounted value is assumed to earn
the risk-free rate over time.
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Moreover, this item includes the expected return on the free
surplus assets using the risk-free
rates, and the release for the financial year ended March 31,
2013 of time value of financial
options and guarantees, cost of holding required capital and
allowance for non market risk.
Expected existing business contribution(In excess of risk free
rate)
Rates of future expected returns are assumed to be the risk-free
rates when calculating EEV.
However, Lifenet expects higher rates of returns on these assets
than the risk-free rates. In
calculating the expected existing business contribution in
excess of the risk free rate, Lifenet
uses the expected rate of return (0.52%) which consists of the
risk free rate on the 1 year swap
yield plus a risk premium (0.17%).
Expected transfer from value of in-force business to adjusted
net worth
This item represents the after-tax surplus expected to emerge
during the period from the business
that was in force at the beginning of the period.
In this period, the difference between the reserve and the
full-zillmerized reserve widened. This
resulted in a decrease in the required capital, and an increase
in the free surplus. See section
4.(10) for details of required capital.
The effect is a movement of value from the value of in-force
business to the adjusted net worth.
This does not affect the total embedded value.
Operating experience variances
This is the impact on the embedded value of differences between
the actual experience and the
operating assumptions during the period. The main reason for
difference is that actual
experience of mortality and morbidity was lower than the
assumptions in the calculations of the
value of in-force business. See section 5.(2) for details of the
operating assumptions.
Assumption changes
The impact of changes in the operating assumptions. This item
has been calculated as of the
beginning of the period. The main impact is associated with
expense assumption changes. See
Section 5.(2) for details of the operating assumptions.
Economic variances and assumption changes
This is the impact of differences between the actual investment
returns in the period and the
expected investment returns, including the impact on the value
of future profits from the change
to the end of period future economic assumptions. See Section 5.
(1) for details of economic
assumptions.
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Adjustment to the value at March 31, 2013
This amount consists of shareholder dividends or increases to
capital. This is the impact of
increasing capital in the period.
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4. EEV Methodology
(1) Basis of preparation
The methodology and assumptions adopted by the company to
calculate the EEV as of March 31,
2013 are in accordance with the EEV Principles and Guidance
issued by the European CFO Forum
in May 2004.
(2) Covered business
The covered business represents all of the life insurance
business of the company.
(3) Embedded value (EV)
The embedded value comprises the sum of the adjusted net worth
and present value of future
after-tax profits from in-force business, which provides an
estimate of the value of the shareholders’
interest in the covered business. The adjusted net worth is the
net assets attributable to shareholders,
and is represented by the sum of required capital and free
surplus as discussed further below. The
value of in-force business is the present value of the projected
stream of future after-tax distributable
profits available to shareholders from the existing business at
the valuation date, allowing for risk on
a product-by-product basis, and with adjustment for the cost of
holding required capital. The future
profit includes renewal of in-force business but excludes any
value that may be generated from
future new business. Assumptions used in the calculation are
made on a best estimate basis.
(4) Allowance for risk
According to the EEV Principles all risks related to the covered
business must be reflected. This is
accomplished, for example, by allowances for the cost of
financial options and guarantees, for the
cost of holding policy reserves and any additional required
capital, and by adoption of a risk
discount rate. The company has used a market-consistent approach
based on the principles of finance
theory to allow for risk, as follows.
- Assets and liabilities other than policy reserves are valued
at market value.
- Investment return assumptions and risk discount rates are set
consistently with the risk profile of
each cash flow.
- The time value of financial options and guarantees associated
with the life insurance business is
valued explicitly and consistently with market prices of
equivalent traded options. (The products of
Lifenet are non-participating death and medical coverage
protection products with no surrender
value and so in practice no time value of financial options and
guarantees needs to be allowed for.)
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A market-consistent value assigns a value to cash flows in line
with the prices of similar cash flows
traded on the open market.
Further details of the methodology are described in the
sub-sections below.
(5) Adjusted net worth
Adjusted net worth represents the net assets attributed to
shareholders and represents the market
value of assets in excess of policyholder liabilities,
represented by statutory reserves (excluding
contingency reserve), and other liabilities (excluding reserve
for price fluctuations).
In other words, adjusted net worth is calculated by adjusting
the total net assets on the balance sheet
for the retained earnings in certain liabilities and unrealized
gains/losses in assets/liabilities not
accounted for under the mark-to-market methodology. Deferred
assets defined in article 113 of IBA
and related DTL is also adjusted.
(6) Value of in-force business
The value of in-force business is calculated as follows:
Certainty equivalent present value of future profit
less Time value of financial options and guarantees
less Frictional cost of capital
less Allowance for non market risk
A description of each item in the above formula is provided
below.
(7) Value of new business
The value of new business is the value of new policies issued
during fiscal year 2012. Future
renewals of those new business policies are included in the
value of new business, while the values
that may be generated from future new business are not.
The value of new business has been calculated as of March 31,
2013, and consists, like the EV, of the
adjusted net worth and the value of in-force business. The
adjusted net worth represents the impact
of all cash flows arising from the point of sale to March 31,
2013. The value of in-force business in
respect of new business is calculated in the same manner as the
value of in-force business shown in
(6), and using the same assumptions.
(8) Certainty equivalent present value of future profit
The certainty equivalent value is the present value of future
after-tax profits, calculated on a
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deterministic basis, assuming all assets earn the risk-free rate
and all cash flows are discounted at the
risk-free rate. The certainty equivalent approach ensures that
future investment risk premiums are
not capitalized in the embedded value.
(9) Time value of financial options and guarantees
There are no options and guarantees, and therefore the time
value of financial options and guarantees
is zero.
(10) Required capital
Required capital is a part of adjusted net worth required to
back the covered business and therefore
cannot be immediately paid out to shareholders. The EEV
Principles define the minimum required
capital to be equal to the statutory minimum capital
requirement, and also allows companies to use
other levels of required capital, such as their own required
risk assessment, as long as the minimum
requirement is satisfied.
Reflecting the operation of Lifenet as a going concern, a level
of required capital corresponding to a
500% Japanese statutory solvency margin ratio was assumed. This
satisfies the EEV Principles (note
the statutory minimum in Japan is a 200% solvency margin ratio).
Japanese solvency regulations
allow for the excess of the reserve over the full-zillmerized
reserve to be counted as part of the
solvency margin. The calculation of the amount of required
capital reflects this benefit.
The adjusted net worth can broken down into required capital and
free surplus as follows.
(Millions of yen)
March 31, 2012 March 31, 2013 Increase
(Decrease)
Adjusted net worth 13,425 12,078 (1,347)
Required capital 1,308 1,315 6
Free surplus 12,117 10,763 (1,353)
(11) Frictional cost of capital
This item is the cost of having to retain the level of required
capital, and within the EEV bottom-up
approach, it is referred to as “frictional cost”.
Within this item, tax on investment returns on required capital
has been allowed for. Investment
expenses incurred in respect of the assets backing the required
capital (another frictional cost) are
reflected in the unit cost assumptions.
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(12) Non market risk
EEV Principles define the EV to be calculated taking all the
risks of the covered business into
account. There are some non-market risks where the existing best
estimate experience assumptions
do not allow for the impact on embedded value of the full range
of potential outcomes. These risks
should be allowed for in the EEV through the allowance for
non-market risk.
Lifenet estimated these costs for insurance risks including
operational risks, lapse risks, mortality
and morbidity risks, using a simple model, and has made
allowance for these risks in the EEV
calculation.
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5. Principal EEV Assumptions
(1) Economic assumptions
In the certainty equivalent calculation, the discount rates and
investment yields are the risk-free rates
at the valuation date (March 31, 2013). These risk-free rates
have been determined based on swap
rates. The table below shows, for selected terms, the swap rates
used.
1 year 2 year 3 year 4 year 5 year
Swap Rates as of
March 31, 2013 0.24% 0.22% 0.23% 0.26% 0.30%
Swap Rates as of
March 31, 2012 0.34% 0.35% 0.39% 0.42% 0.49%
10 year 15 year 20 year 30 year 40 year
Swap Rates as of
March 31, 2013 0.69% 1.14% 1.47% 1.71% 1.84%
Swap Rates as of
March 31, 2012 1.04% 1.49% 1.75% 1.91% 2.00%
(2) Other assumptions
All cash flows (premium, commission, non-commission expense,
death benefit, tax, etc.) were
projected by applying best estimate assumptions. Expense
assumptions have been set based on the
latest year’s experience and business plan, and other
non-financial assumptions have been set based
on past experience and industry experience.
Expenses
Expense assumptions have been set as best estimate assumptions,
based on the latest year’s
experience and the latest business plan.
Some expenses were eliminated as one-off expenses which are not
expected to occur regularly in the
future. The amount of one-off expenses incurred during the
fiscal year 2012 and eliminated in the
derivation of the assumptions was ¥219 million (pre-tax), which
mainly relate to costs for system
development and costs related to listing on the Tokyo Stock
Exchange Mothers.
The short period since Lifenet started operations causes a high
per-policy expense in actual
experience to date. The maintenance expense assumption has been
set assuming a continuous
increase in the number of policies in-force over the first 10
years (until March 31, 2018) of operation,
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so that the maintenance expense per policy decreases over this
period, and the ultimate expense
assumption has been allowed for from 2017 onwards. In setting
Unit costs, Lifenet allow for
consumption tax rates assumption (including local consumption
tax), which has been set 5% (until
fiscal 2013), 8% (fiscal 2014 to 30 September, 2015) and 10%
(from 1 October, 2015 onwards).
Inflation rate is set to 0%.
For the purpose of calculating the Value of new business, the
actual acquisition expenses incurred in
the reporting period have been allowed for together with the
same maintenance expense assumptions
used to calculate the EV.
For reference, the value of new business based on the ultimate
unit cost (“Ultimate Unit Cost Base”),
has been calculated with the ultimate maintenance expense
assumption for fiscal year 2017 applied
from the issue date.
Claim Payment, Lapse
As experience to date in claim payments and lapses is
insufficient in isolation to set projection
assumptions, the assumptions for claim payments and lapses have
been set at what the company
considers to be a reasonable level based on industry experience
and considering its own past
experience.
Premium
The policy contract for term life and term medical allows the
premium rate to be recalculated on
renewal. In projecting renewal premiums, current premium rates
have been used, taking the renewal
age of the policyholder into account.
Policy reserve
The premium reserve which is a part of policy reserve is
calculated in line with the 5 year
zillmerized reserving method in accordance with Insurance
Business Regulation 69.4.4. Lifenet
adopted this method for the calculation of the future projected
profits, except that after the renewal
of the policy contract for the term life and term medical care,
the future projected profits are
calculated in line with the standard valuation reserving method,
regulated by the IBR issued by FSA.
Corporate tax
In the future corporate tax calculation, the expected corporate
tax offsets associated with losses
carried forward as of March 31, 2013 were calculated and
included in the value of in-force business.
The effective corporate tax rates assumption (including local
tax) has been set based on 33.33%
(until fiscal 2014), 30.78% (from fiscal 2015 onward).
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6. Sensitivities
The impacts of changes in assumptions (sensitivities) on the EEV
results are summarized below. For
each sensitivity, only one specific assumption is changed and
other assumptions remain unchanged.
It should be noted that the effect of the change of more than
one assumption at a time is likely to be
different from the sum of sensitivities carried out separately.
As Japanese policy reserves are
calculated in accordance with the IBR, the sensitivities carried
out do not affect the reserves at the
valuation date. The sensitivity on the value of new business
excludes the impact on the adjusted net
worth.
(Millions of yen)
Change in EEV as
of March 31, 2013
Change in Value of
New Business
EEV and New Business Value as of March 31, 2013 18,746 127
Sensitivity 1a: 1.0% increase in risk-free rate 1,204 382
Sensitivity 1b: 1.0% decrease in risk-free rate (2,446)
(743)
Sensitivity 1c: 0.5% increase in risk-free rate 675 213
Sensitivity 1d: 0.5% decrease in risk-free rate (993) (299)
Sensitivity 2: 10% decrease in equity and real estate value (12)
－
Sensitivity 3: 10% decrease in operating expenses 1,098 374
Sensitivity 4: 10% decrease in lapse rate (900) (250)
Sensitivity 5: 5% decrease in claim incidence rates for life
business 2,545 766
Sensitivity 6: 5% decrease in mortality for annuity business －
－
Sensitivity 7: Change the required capital to 200% of
solvency margin ratio 84 26
Sensitivity 1a: 1.0% increase in risk-free rate (for all future
years)
Sensitivity 1b: 1.0% decrease in risk-free rate (for all future
years)
Sensitivity 1c: 0.5% increase in risk-free rate (for all future
years)
Sensitivity 1d: 0.5% decrease in risk-free rate (for all future
years)
Fixed interest assets (bonds, etc.) are revalued according to
the change in the interest rate. The
value of in-force business and the adjusted net worth are
re-calculated according to the change
of investment yield and discount rate. However if the risk-free
rate becomes negative after the
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deduction of 1.0% or 0.5%, 0% is applied instead.
EEV Guidance only requires disclosure of the sensitivity of a 1%
increase/decrease in risk free
rate, but a sensitivity of 0.5% is shown as well considering the
low level of interest rates in the
Japanese market.
Sensitivity 2: 10% decrease in equity and real estate value
Market values of equities and real estate at the valuation date
are reduced by 10%.
Sensitivity 3: 10% decrease in operating expenses
A factor of 0.9 is applied to expenses connected with the
maintenance and continuation of
contracts, leaving other expenses unchanged.
Sensitivity 4: 10% decrease in lapse rate
Base lapse rates are multiplied by 0.9.
Sensitivity 5: 5% decrease in claim incidence rates for life
business
Base claim incidence rates (mortality and morbidity) are
multiplied by 95%. The possibility of
premium rate cuts and any other management actions associated
with such changes in the claim
level are not reflected.
Sensitivity 6: 5% decrease in mortality for annuity business
Not applicable as Lifenet has no annuity business.
Sensitivity 7: Change the required capital to 200% of solvency
margin ratio
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7. Notes on the Use of the Information
The calculation of EV results involves certain assumptions
regarding future projections that are
subject to risks and uncertainties. It should be noted that
actual future results might differ materially
from the assumptions used in the EV calculations, and users of
this information are advised to be
cautious.
8. Third Party Opinion
Lifenet engaged Towers Watson to review its EEV results and
obtained the following opinion.
Towers Watson has reviewed the methodology and assumptions used
to determine the embedded
value results as of March 31, 2013 for Lifenet. The review
covered the embedded value as of March
31, 2013, the value of new business issued in fiscal year 2012,
the analysis of movement in the
embedded value during fiscal year 2012 and the sensitivities of
the embedded value and new
business value to changes in assumptions.
Towers Watson has concluded that the methodology and assumptions
used comply with the EEV
Principles and Guidance. In particular:
The methodology makes allowance for the aggregate risks in the
covered business through
Lifenet’s market-consistent methodology as described in section
4 of this document;
The operating assumptions have been set with appropriate regard
to past, current and expected
future experience, whilst noting that Lifenet only started
business in May 2008 and therefore
the experience data is limited; and
The economic assumptions used are internally consistent and
consistent with observable market
data.
Towers Watson has also reviewed the results of the calculations,
without however undertaking
detailed checks of all the models, processes and calculations
involved. On the basis of this review,
Towers Watson is satisfied that the disclosed results have been
prepared, in all material respects, in
accordance with the methodology and assumptions set out in this
disclosure document.
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20
In arriving at these conclusions, Towers Watson has relied on
data and information provided by
Lifenet. This opinion is made solely to Lifenet in accordance
with the terms of Towers Watson’s
engagement letter. To the fullest extent permitted by applicable
law, Towers Watson does not accept
or assume any responsibility, duty of care or liability to
anyone other than Lifenet for or in
connection with its review work, the opinions it has formed, or
for any statement set forth in this
opinion.
